Where is the Wealth of Nations?

If you have ever had a conversation with a finance minister couched in terms of hectares of forestland or tons of greenhouse gases, then you appreciate one of the central problems of environment and development. It tends to be a short conversation, and for good reason – talking about the environment and natural resources this way simply doesn’t fit the model used by economists. If we want to reach ministers of finance and development planning we need not only to value the economic contribution of nature, but to express it in the framework of the System of National Accounts (which includes, among other measures, Gross Domestic Product or GDP as the predominant indicator of economic progress used by macroeconomists).

Where is the Wealth of Nations?, [1]the World Bank’s best-selling book published in 2006 tackled this problem head-on by building comprehensive wealth accounts, spanning produced, natural and intangible capital, for over 100 countries. The results were striking: in extractive economies like Venezuela or Nigeria, total wealth would be four to five times as high today if they had used the revenues from resource extraction to invest in other forms of wealth. A follow-up book, The Changing Wealth of Nations, measures wealth creation over the decade 1995 to 2005. Soon to be released, the new volume has a chapter on ‘Wealth Accounting in the Greenhouse’ which values carbon dioxide stocks and flows country by country. We are making progress on valuing nature in the national accounts.

This week in Nagoya, at the conference of parties of the Convention on Biological Diversity, the World Bank will announce[2] a new partnership on ecosystem services valuation and wealth accounting. Ecosystem services such as pollination by insects, regulation of water flow by forests, and coastal protection by mangroves, contribute to the productivity of farmland and fisheries in particular, but their economic contribution is generally unmeasured in national accounts. This puts the natural assets providing these services at risk when development decisions are taken. Over the next few years we will see new results on the value of ecosystem services in national accounting.

Coming back to GDP, Eduardo Ley and I have argued in a recent Economic Premise[3] that a better measure of growth in extractive economies is provided by Net National Income (NNI) adjusted for depletion of natural resources – this accounts for profits flowing out of the country from the resource sector as well as depletion. Even with a better measure of income, using last year’s growth as the key economic performance indicator is like driving while only looking into the rear-view mirror. Adjusted Net Saving (published in the World Development Indicators since 1999) is a measure of wealth creation that includes resource depletion and investment in human capital. It is inherently forward-looking. Unfortunately, thinking about savings and wealth does not seem to come naturally to many macroeconomists – which is odd given that wealth creation, broadly conceived, is synonymous with ‘development.’ So we still have work to do on bringing nature fully into economic discourse.